Relevant Demographic Trends affecting Mead Johnson Nutrition Company

Population Trends: CHINA

Chinas population growth rate has been decreasing. It is currently 159th in the world at 12.31 per 1000 people. This poses issues that there will be demand decreases.

However there are positive population statistics that could mean an uptick in this rate: The average age women in China have babies is 28 years old. Chinas age group between 20-24 and 25-29 are the 2nd and 3rd largest segments of the population, which has the potential to spur increase ages 0-4 populations in China over the next 8 years, but more significantly in the next 4.

This has already led to a recent increase in the proportion of the Chinese Population between 0-4 years old.

However, dont bank on Chinas new revision of the One Child Law to have too significant of an impact. In only allows couples to have two children if one of the parents is an only child. Previously, a couple could generally only have a second child if both parents were only children. Ultimately, this only affects about 5.8% of the population.

Other positive/negative trends

The value of the infant formula market in China was $9 billion in 2012 but is now forecast to grow an additional $950 million a year from the expected 2 million more babies who will be born each year. Last August the Chinese government began taking a more activist role in monitoring the industry, fining six infant formula companiesincluding five foreign suppliers-$109 million, a record amount, for price-fixing. Glenview-based Mead Johnson had to pay $33 million in penalties. Chinas currency relative to the dollar has been decreasing. This means lower production costs. Chinas Infant mortality rate is down 24% since 2010 (vs. 4% in the US)

An increasing GDP per capita means the average population is better offgood for an increase in demand.

SINGAPORE:
Singapore also has seen an increase in the number of individuals age 0-4 composing the population. However, it does have one of the lowest birth rates, which could lead to demand shortages.

Depreciating currency means cheaper production costs

ARGENTINA AND SOUTH AMERICA:

Mead Johnson has moved to target areas in Latin America, focusing more specifically on Argentina and Southern Cone areas of the continent. From a population demographics perspective, there is little to suggest an uptick in demand for baby formula products (although there may be other factors not related to population) Argentina population from 0-4 has flattened out (graph 1), the birth rate is declining (graph 2) and projections for Latin America populations 0-4 are projected to decrease significantly out into 2050

One positive note, however, may be that GDP per capita in Argentina has increased 10% from 2011-2012 (2013 is not yet available). This means the average person has more to spend on products such as baby formula.

WIC
Special Supplemental Food Program for Women, Infants and Children (WIC), on which the federal government currently spends $2.5 billion annually Infant Formula Market Is Highly Concentrated Abbott: 43 % share of the market Mead Johnson: 40 % Gerber : 15 % Since the mid-1990s, these three firms have been the sole infant formula manufacturers awarded WIC contracts. Milk-based formula in powder form is the primary type of formula purchased by both WIC and non-WIC consumers, accounting for 72 percent of all dollar sales. WIC contract brands accounted for 51 percent of all sales of milk-based powder formula in non-WIC sizes. -While there have been no cuts to WIC programs with the new the new Farm Bill, the only foreseeable potential political risk is if the government shuts down again for any prolonged period of time, because WIC funding is one of the programs that runs out of money quickly.

CHANGES IN COST OF MILK PRODUCTION

USA: This farm type represents a larger family farm type and roughly 30% of milk in the USA. In the US, costs were relatively stable from 2000 to 2006 as inflation driven change of input prices could be compensated by increasing milk yields. Once feed prices started rising, this had a direct impact on these farm and costs, which increased by 50% to a level of 38.5 USD per 100 kg milk. The sharp drop in costs in 2009 can be interpreted as a result of very bad milk prices, when farmers tried to cut costs wherever possible. Until the year 2012, cost had increased mainly driven by feed prices - towards 44 USD per 100 kg milk. US dairy farms had a significant cost advantage over larger family farms in Germany for over 10 years. In the year 2012, the costs were on a similar level.* China: This typical farm with 340 cows represents a larger farm type in China but not the very large farms. We estimate that this farm type represents 30-40 % of the milk produced in China. The costs on Chinese farms rose steadily from 2000 to 2005, following increases in feed and labor prices. Since 2006, an additional increase in cost due to the appreciation of the Yuan could be seen. In 2012, the Yuan had gained value by + 25% to the USD compared to 2000. The costs on Chinese farms did not drop sharply in 2009 as was observed in most other countries, because the drop in prices in national

currency was almost fully compensated by the appreciation of the Yuan. From 2010 until 2012, the rising feed prices were a strong driver for increasing cost of production.* Argentina: This farm represents an average sized farm in Argentina, which keeps about 40-50% of the cows. The costs of a 170-cow farm in Argentina have more than doubled since 2002. Nevertheless, the positive trend has slowed in the last 5 years and costs have become more volatile. After a cost decrease in 2011, an increase could be experienced again in 2012. This latest development was mainly driven by a decrease in milk yield due to unfavorable weather conditions.* *from the IFCN Dairy Research Center